Corporate social responsibility of organizations

University Degree Business and Administrative studies

One of the most controversial issues that has been widely debated over the last two decades is the corporate social responsibility of organizations. Opinions about business's social responsibilities lie mainly between two extremes. At the one extreme is the classical view that states business is an economic institution directed towards profit whose only responsibility to society is to provide goods and services and to return maximum benefits to shareholders (Robbins, Bergman, Stagg and Coulter, 2003: 136). The Nobel Prize winning economist Milton Friedman endorsed this classical view. Friedman said the primary responsibility of manager's is to operate the business to satisfy the interest of shareholders, and this interest of course is profit maximization (Robbins et al., 2003: 136). At the other extreme, there is the socioeconomic view that states business is a part of the larger society and, therefore, it has responsibilities other than simply maximizing profits (Robbins et al., 2003: 137). Some proponents of this view also contend that it is often in a company's financial self-interest to be socially responsible.

The topic of corporate social responsibility has been widely argued and debated about because it is becoming an increasingly important concern to the society in which an organization operates in. Over time the classical economic theory based business social responsibility evolved to see business social responsibility as more than just profit. Businesses worldwide have become more socially responsible, but they still are pursuing economic interests. Economic interests will always remain the number one priority for businesses all over the world. "Any mechanism for enforcing or urging social responsibility upon firms must of course reckon with a profit motive..." (Arrow, 1973: 304). This essay is going to look at the views of corporate social responsibility and then critically analyze the issues related to it, and then drawing up to a conclusion.

In any business, the main motive is of course profit. Businesses need to recover the money that they have invested in the market, and the fastest way of doing this is of course by profit maximization. When an organization engages in a business, they will face competition from other entrants in the same market. So, for an organization to get an edge over its competitors and stay in business, it has to lower the price of its goods or services (Arrow, 1973: 305). In any case, the company with the lowest price will most likely have an edge in selling its product compared to its competitors. The only way to achieve this is by reducing the cost of doing business by getting rid of unnecessary expenses. In this case, being socially responsible adds cost of doing business. These additional costs will be passed on to the consumers of the product, and this does not give an organization advantage over its competitors. For example, let's say company A and company B enters the market of making shoes together. Company A acts socially responsible and acts in the goodwill of the society, and on the other hand, company B satisfies only the minimum requirements of social responsibility that is required by the law. In this case, of course company B's products will be cheaper than company A's product because it has less production costs. And if a consumer goes to the shop to buy a pair of shoes, most probably the consumer will choose company B's product, because it is cheaper. In this case, company B gains the market share in the short run and most probably the long run as well. So, when a company is making profits there is no incentive for it to act socially responsible.

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Another drawback of the socioeconomic view is that most organizations, especially those which produce harmful material, practice social responsibility just to divert the society's attention away from the business operation. Products based on tobacco and alcohol has been long unwanted by the majority population in a society. Companies like British American Tobacco and Brown & Williamson in a way are actually forced to practice social responsibility because they want to maintain their business. "Two leading tobacco policy experts have today accused transnational tobacco companies of corrupting the concept of corporate social responsibility (CSR) by seeking to use it as a means of directing attention away from the deadly effects of their products and dubious business practices" (Collin and Gilmore, 2002). Even though they are considered to be a company that is socially responsible, it is assumed that their products will cause ten million deaths by the year 2030. So, in the long run, the society will actually be worse off from the organizations business practices. Social responsibility is just used as a means to cover up the business practices that otherwise would not be accepted in the society. "BAT's Social Report is an attempt to regain legitimacy by a company that has become mired in allegations of smuggling, price fixing, collusion with the dictatorship in Burma an exploitation of farmers in Brazil and Uzbekistan" (Collin and Gilmore, 2002). So, the social responsibility issue is used more of a cover to protect bad business practice rather than to serve in the best interest of the society.

No organization is forced to pursue social interests. Milton Friedman argues that corporate officials have no social responsibility beyond serving the interests of their stockholders As Friedman said, "...there is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud"(Coelho, McClure and Spry, 2003: 15). This means that as long as a company acts inside the four corners of the law, they are acting socially responsible. Other than that, they can't be held to pursue social interests. Every action of the organization will have a motive, and in this case if they are doing social good, they will have their own agenda. "..., there is little evidence to suggest that firms have adopted a strategy of social responsibility for their own sake, particularly in the area of environmental impact" (Smith (1991) cited in Bichta (2003: 14)). This means that organizations adopt social responsibility not because they want to, but because they have to. If given a choice, most probably they would disregard social responsibility altogether and pursue economic goals only.

In the classical view, profit is the first and foremost priority of the organization. This is true in all organizations, except for non-profit organizations, where social well-being of the society is their primary importance. Organizations are charged with corporate tax by the government. These taxes are a very large source of revenue for the government. When a company adopts the socioeconomic view, they would donate money to charitable organizations or spend money on developing a community. The money used for this will be exempted from tax, thus leaving the government with less revenue and making it less powerful in the eyes of the society. For example, every 100 million a company spends to promote social well being, the government will be poorer by a 100 million. This makes the organizations much more powerful than before, because now not only they control the business sector but also the social sector (Robbins et al., 2003: 139). The government will be virtually powerless against them. Organizations having too much power can be dangerous to the society, this is because they can then do whatever they want and there would not be anyone to regulate them. It is better if the company pays the tax to the government, and then let the government to decide which sector needs to be developed with that money.

Business leaders also lack the necessary skills to address current social issues (Robbins et al., 2003: 139). They might not have the expertise to analyze the situation well and make good decisions regarding social issues. This is because it is not their jobs to do so. A survey was carried out in India to see whether companies would want to incorporate corporate social responsibility in their business practice. The feedback was positive but many executives did not even know what corporate social responsibility meant. "Indian corporate executives are showing a growing desire to give something back to society, but many don't know how to go about it" (The Hindu Business Line, 2003).The job of addressing social issues is left to politicians and government officers because it is their jobs to solve social problems. Business leaders should stick to managing their organizations and think of ways to advance in the industry that they are operating in.

Perhaps one of the strongest arguments against the socioeconomic view is that the business belongs to the shareholders. The shareholders fund the business and they should be the ones who decide what to do with the profits that they gain from the business. A corporate executive has no right to spend the shareholder's money on a social interest. "Friedman assigned business with the sole responsibility of promoting the interests of shareholders" (Bichta, 2002: 13). The question that any organization should ask themselves is "Have we met our fiduciary duties to the shareholders?" (Coelho et al., 2003: 15). The fiduciary duty here is providing returns to the shareholders. This strongly suggests that the classical view should be used to satisfy the organizations responsibility towards the shareholders. When the money is returned to the shareholders, then they should decide what to do with it, because as the rightful owners of the organization, they have the right to spend the money however they want. When the organization has satisfied its fiduciary duties towards the shareholders, then it can move on to act socially responsible towards the society, if it wants to do so.

Another argument against the socioeconomic view is that most companies that actually adopt the socioeconomic view are not one of the top ones. For example, in the recent survey done by Financial Times regarding the World's Most Respected Companies, the companies that got the top places are not the ones that act in the society's well being. According to the survey, the three most respected companies are Microsoft, General Electric and IBM (PricewaterhouseCoopers, 2002). Microsoft and General Electric were never very famous for their corporate social responsibility. Microsoft and General Electric are one of best examples of companies who adopted the classical view and have reached to the top. In this case, the argument for social responsibility which states that public image can be created through the socioeconomic view can be rebutted immediately. Microsoft and General Electric have both been involved in dominating the market, polluting the environment and also downsizing their companies just to make additional profits in the course of their business. Nevertheless, these companies are the most respected ones in the society. This shows that the society gives priority and respect to companies that know how to do the business and how to gain financially from the business.

One interesting example that can be used to analyze the topic of corporate social responsibility is the recent case with Enron. Enron grew very fast; in just 15 years it emerged to become America's seventh largest company (Enron scandal at-a-glance, 2002). Now Enron has been declared bankrupt. In the duration 15 years, Enron was a company that acted socially responsible, producing social reports, increasing the society's social well being and also donating millions of dollars a year to increase the social well being of the society. But now, critics say that the company has always been a poor company. The company has lied about its profits through out the 15 years of operation. But all these flaws were not detected due to one reason; the company was acting socially responsible towards the society. This actually proves that corporate social responsibility is actually used to cover up a lot of mishaps. It acts as a shield for companies such as Enron. If the society were more aware and looked at Enron beyond its social involvement with the society, the whole scandal could have been avoided.

Another point against corporate social responsibility is that even though it has been proven in some cases that incorporating social responsibility is profitable, not many companies incorporate it because social responsibility talks about profits in the long run, where else companies need the profits now just to survive and carry on with business operations. Many companies realize the long-run benefits of corporate social responsibility but cannot afford to sacrifice short-term needs for long-run benefits. Moreover, what is far from now is always perceived as something more risky. Many companies are simply not sure that they will stay in business long enough to receive the benefits of corporate social responsibility. All in all, quite frequently short term goals are much more important for companies than long-term ones.

In conclusion, the topic of corporate social responsibility will always be something that will be argued about. Both the classical and socioeconomic view will be used in various organizations globally. But, the fact still remains that any organizations main goal is of course, without any doubt, economic interests. No organization in this world, except for non-profit organizations, will open a business to take care of the society's well being. Since economic interests are the main priority of any organization, it is safe to say that all organizations actually practice the classical view in the real world. Classical view is something that is realistic and in fact is being put to practice by all organizations. On the other hand, the socioeconomic view is a bit farfetched and treats the organization as a human being rather than a business." Corporations have no existence beyond this legal fiction, and, unlike real people, can have neither responsibilities nor ethics" (Coelho et al., 2003: 15). The classical view of profit maximization is a realistic and applicable view while the socioeconomic view is more of a publicity stunt for companies who need the attention from the public. The classical view will always be practiced by companies because the ultimate aim of any organization is profit maximization.

Reference List

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*BBC News. (2002), Enron scandal at-a-glance, http://news.bbc.co.uk/1/hi/business/1780075.stm, (Accessed 12 May 2003).

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*Collin, J. and Gilmore, A.B. (2002), Tobacco industry accused of corrupting ideals of corporate social responsibility, http://www.lshtm.ac.uk/news/2002/tobaccoindustry.html, (Accessed 12 May 2003).

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*Robbins, S.P., Bergman, R., Stagg, I. and Coutler, M. (2003), Management, 3rd Edition, Prentice Hall: Australia, pp.136-149.

*The Hindu Business Line. (2003), India Inc keen on social responsibility, http://www.infochangeindia.org/CorporatesrItop.jsp?section_idv=11, (Accessed 12 May 2003).

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